Oneok to buy Magellan Midstream Partners in deal valued at $18.8B

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Oneok (NYSE:OKE) said Sunday it agreed to acquire Magellan Midstream Partners (NYSE:MMP) in a cash and stock deal valued at ~$18.8B including assumed debt, resulting in a combined company with a $60B total enterprise value.

The consideration will consist of $25/share in cash and 0.667 common share of Oneok (OKE) for each outstanding Magellan (MMP) common unit, representing a current implied value to each Magellan unitholder of $67.50/unit for a 22% premium based on the May 12 closing price.

Oneok (OKE) said it expects the deal to be earnings accretive beginning in 2024, with EPS accretion of 3%-7% per year during 2025-27 and free cash flow per share accretion averaging more than 20% during 2024-27; base synergies are expected to total at least $200M/year.

The combined company will own 25K-plus miles of liquids-oriented pipelines, with significant assets and operational expertise at the Gulf Coast and Mid-Continent market hubs.

Oneok (OKE) expects the combined portfolio will present significant potential for enhanced customer product offerings and increased international export opportunities, which it said could result in total annual transaction synergies exceeding $400M within 2-4 years.

More on Oneok:

• Financial and valuation comparisons to sector peers
• Analysis: Oneok: Strong Cash Flow Outlook For 2023 Boosted By One-Time Insurance Payout
• Stock price return: Down less than 1% YTD, up 1.5% in the past 12 months

Comments

[Jim Odell]

Can a loss in another security be used to offset the ordinary gain in MMP?

[darnoc111]

@Jim Odell No, ordinary gain is income if I remember right. But better to ask an account who deals with these items. Capital gains can be offset by the losses taken from other investments.

[doglesby17]

@darnoc111 Of course it can. Realized gains and losses are always netted against each other.

[houtex]

@doglesby17
Capital losses cannot be netted against ordinary income (other than $3,000 a year if you have no gain to apply them against)

[das555]

Doubt if many long term MMP unit holders will vote for it"
"The closing of the transaction is subject to customary closing conditions, including the approvals of both ONEOK shareholders and Magellan unitholders, as well as Hart Scott Rodino Act clearance."

[rlp2451]

@das555 With over 50% institutional ownership this won't have any problem getting approval from unitholders.

[Hampton108]

With all the hullabaloo yesterday and today, I forgot about the $1833 dividend I received to go along with selling all my shares…I’ll miss that dividend…:(

[Whiterabbit66]

When looking at tax package support my ordinary gains look correct and match the distributions I have received. Yet the capital gains looks way off. I am about break even in reality but tax package shows 10k of capital gains. Distributions attract regular income tax and also capital gains as they lower the cost basis in a forced sale such as this? If that's the case I have owned MMP for 6 years and think I have lost money even though I am selling at around about what I paid. Is that possible?

[houtex]

@Whiterabbit66
Your basis gets reduced by net losses so that might be it. Remember you may have some suspended losses.

There are a few misstatements in your comment. Look at this: eic.energy/...

[Whiterabbit66]

@houtex Thanks for the link which I read a couple of times. After looking at taxpackage support again maybe I am not reading their calculator headings correctly. Specifically the cumulative adjustments seems way to high. Some of the shares I purchased in 2017 have a cost basis close to zero. No way I have got that amount of distributions in just 5 years at a roughly 8% yield. As you say maybe there are suspended losses not showing etc.

[houtex]

@Whiterabbit66
“the cumulative adjustments seems way to high. Some of the shares I purchased in 2017 have a cost basis close to zero. No way I have got that amount of distributions in just 5 years”
Your basis is also reduced by losses (and increased by income). There’s also the chance that their data is just wrong, so maybe pull your K1s and add up the negative income and distributions?

[Hocky]

If you own MMP in a brokerage account (not an IRA) as is the rational way to do it AND have been valuing your assets based the current AFTER-TAX value of MMP (including all capital gains taxes, and recapture taxes (the 2016 tax law allows you to disregard 20% of the recapture tax if you sell your shares before 12/31/2016)), you would not be surprised at the after-tax value of the current ONEOK offer and how it compares to a sale of your MMP units that you might make today or before the deal closes.

Of course, if you expected to hold your MMP units until you died, so your heirs could get the stepped-up basis, you lose that significant benefit if the ONEOK purchase is finalized.

Since you can always sell the OKE shares once you get them, and your basis will be the value of those shares on the date of acquisition (the $25 cash consideration is not a part of your basis in the OKE shares) so there will be little or no capital gains taxes if that sale is made around the time you get the OKE shares, a key question is whether to sell the MMP units now or wait to get the cash and OKE units later this year. That decision is not really affected by tax considerations IF YOU HAVE BEEN VALUING MMP ALL ALONG AT ITS AFTER-TAX VALUE.

Answering the key question of sell now or hold really depends on three things: (1) whether you think the deal will close, (2) what you think the market price will be for OKE on the date you acquire the OKE shares, and (3) whether you think someone else will offer a higher price in the months to come. If you think the deal will close and no one else will offer a better price (the most likely results), then to decide whether to sell today or hold you should focus on (a) today's MMP price (right now its $63.29) and the total consideration you expect from the OKE purchase. At OKE's price right now -- $58.60 -- and assuming that is the price of the day you sell it to OKE, plus the $25 cash per MMP share, the value of your MMP holding is $64.09 per share. This is only an 80 cents per share difference.

NOTE: remember you only get .667 OKE shares for each unit of MMP you own. The discussion immediately above reflects that.

If you think the price of OKE on the date of sale will be dollars lower than today, you are better off selling MMP at today's price. If you think the OKE price will be higher on the date of sale, or you would be happy to own OKE at its current price, you should hold on. But the tax consequences are essentially the same either way.

[Income4ever aka Cyclenut]

@Hocky
Nicely done
Food for definite consideration

[MathMan1959]

@Hocky

I don’t anyone will be able to predict where OKE goes from here. The deal will probably go thru. A question is the difference in income over the long term. OKE has a lower dividend rate/yield and you’ll have fewer shares. A lower starting yield and fewer shares means less income unless you reinvest the leftover cash (after paying the taxes on MMP sale) from the deal in more OKE shares to possibly make up the difference.

[doglesby17]

@Hocky I would imagine selling today rather than waiting for the deal to close ensures you don't have your ROC recaptured as ordinary income. Wouldn't that be true?

[RoyalAce]

For many holders of MMP in a taxable account I would seriously consider just selling at these elevated prices, pay taxes on my own reduced basis, and avoid administrative problems later. No fun but s'it happens.

I'm not a tax expert and would consulting one first.

Also if you like OKE, as I do, it's a very well run company, pays well and on the bargain counter now. I added more OKE this morning at a 5+ buck discount to Friday's price.

[Hampton108]

@RoyalAce What I did and am sure I was not alone in that decision…GL

[RoyalAce]

@Hampton108 Peace of mind and resolution are worth something with nothing left hanging.

There's no painless solution when these things happen but unless the deal falls through and you did a taxable event in vain, I don't think you'll regret it. The selloff in OKE was waaaaay overdone but that happens all the time these days with so much nervous money around as they scurry to their AAPL and a few others in perceived safety.

[Invest2Surf]

After considering options I just sold out of 1/3 of my MMP holdings at a little over 64. Not really interested in holding OKE with all that debt, but hedging from selling all since also thinking: 1) OKE may get a bounce before deal closes, 2) slight chance someone else comes along for a bidding war, or 3) Khan nixes deal and I get to keep (at least some) of my MMP.

Curious what other long-term (I've accumulated over the past 20 years) holders are doing. BTW, I was also Kindered, and thought MMP and EPD would be about the last MLPs to convert under any circumstances.

[Income4ever aka Cyclenut]

@Invest2Surf
Who's Khan ?

[Invest2Surf]

@Income4ever aka Cyclenut FTC Chairwoman

[Nona Deville]

@Invest2Surf Even if Khan doesn't approve the deal - MMP has just demonstrated their willingness to 'kinder" the unit holders.

[DavidAlanBruck]

I have read through many of the comments and half of them are unintelligible. My gut feeling is to merely sell my MMP shares, take the cash profit and run. I'm not that impressed with OKE and would not have bought it prior to this buyout.

[MathMan1959]

@DavidAlanBruck

My thought as well. I’m not familiar with OKE and the income will be lower.

[Nona Deville]

@DavidAlanBruck Agree. I sold my MMP today - that $8 pop will pay my taxes, and I can buy EPD and ET to get back in to a nice tax deferred income stream. (I will be dead before I get to zero cost basis)

[Fred. L.]

@DavidAlanBruck

Agree in general....but you might want to wait for an up day in OKE stock since the price of MMP is now tied to movements in OKE

[Zmija]

I don't think that this one will pass antitrust approval. It's a very significant horizontal merger that creates significant market share and has even geographical overlaps

[RoyalAce]

@Zmija The other side of that is that the business segment in the energy space are not the same for the most part. Check the company release and see each of them and then the pro forma.

[Fred. L.]

Just want to remind all MMP holders, that about 8yrs or so ago, if you were a KMP holder, Rich Kinder offered to buy you out at a nice premium and pay your taxes. It was up to you to retain KMI at that point or just sell and move into something else. Is history about to repeat?

[schwagnasty]

@Fred. L. what happned - ive seen getting "kindered"

[Michael Bryant]

@Fred. L.

Well, the long term graph of $OKE shows two dips to about $21/share in 2016 and 2020. After each dip, $OKE climbed to about $70/share. I sold my $OKE shares about a year ago, assuming a similar dip. If it does dip, and I do think the shares could dip more as we get closer to the deal closing date, I may ride the stock back up.

"Oneok was founded in 1906 as Oklahoma Natural Gas Company, but it changed its corporate name to Oneok in December 1980. It also owns major natural gas liquids (NGL) systems due to the 2005 acquisition of Koch Industries natural gas businesses." en.wikipedia.org/...

[Nona Deville]

@schwagnasty As I recall, it ended badly for those KMP shareholders who stuck around. The dividend got chopped and the unit price dropped by 50%... never to recover. Even if this deal doesn't go through, it certainly signals the willingness of MMP to "kinder" their unit holders. This is a serious breach of trust.

[Fred. L.]

Not sure if this topic previously covered in long comment thread, but what is the motivation for MMP mgmt to sell in a taxable transaction.

[jimoc]

@Fred. L., got paid a premium and their future was dimming thanks to FERC

[PipelineDancer]

@Fred. L. Personal pay packages plus get out of refined pipes probably. Investors should consider heeding their gut feel. IMO

[Fred. L.]

@PipelineDancer

I never owned MMP except for some trades here and there....because I always thought refined pipes would be the first to see reduced demand.

[Michael Bryant]

Looks like a good time to buy $OKE again. https://schrts.co/abIeBiBC

[Livejoyfully]

to all MMP owners: you can run a directional calculation of your expected tax requirement on MMP website - gain/loss calculator when accessing your K-1 info. That should be 'good enough', at least based on your ownership as of end of 2022.

also, for anyone thinking about potential future actions: i was wondering the value of ONEOK we may receive - the 0.667*ONEOK price will be determined at the time of close i.e. ~Q3 of this year. Won't be surprised to see a lower price of ONEOK by then, but who knows.

Have a significant holding in MMP so need to think through next steps. Not rushing to make any decisions. Welcoming your thoughts.

[houtex]

@Livejoyfully
”i was wondering how many shares of ONEOK we may receive”

It’s a fixed exchange ratio. It won’t change based on OKE’s price. Just multiply your MMP units by 0.667 and there you have it.

[Livejoyfully]

@houtex you are correct of course. Meant in terms of value, since i see others are looking to calculate how much they may receive in income vs. what if they do not stay with oneok, sell their shares and buy another.

[MathMan1959]

@Livejoyfully

My thoughts:

1. No matter what I do: Unexpected tax event = less funds to reinvest/spend

2. Hold OKE after merger: Fewer OKE shares x smaller dividend = less income going forward

Likely action: Sell OKE after merger and reinvest all proceeds in another stock (non-MLP).

[usiah]

So much for the "I'll pass it on to my kids gambit."

[edaskew]

Hopefully this doesn’t close until 2024?

[schwagnasty]

questions from a novice -
1. if you own MMP shares, do you get bought out? Should you sell your shares now? do they convert to OneOK? ... a little confusing so appreciate any clarity
2. ive owned from 4/21 in a taxable account - and am currently up in value in my position. i know i will get taxed on those gains - but is the fret in the comments from getting taxed on the dividends (example - dividends in '21, '22, and '23 for myself?)

[rlp2451]

@schwagnasty To make it as simple as possible:
Assuming you bought $47.00 in April 2021, and you will have received $10.00 in distributions until the deal is complete. With the buyout & cash you'll be taxed on $67.00 assuming the deal goes through as is. (I'm using round numbers for simplicity.) Worst case scenario (no deductions, distributions are 100% return of capital), your cost basis is $37.00 ($47-$10). Your taxable amount per share is $30.00. If your tax rate is 33% state/federal you'll pay $10 per unit in taxes. (Reserve from the $25 per unit cash to pay the tax.)

[chi_tino]

@schwagnasty Those aren't dividends - I hope you didn't think that you are going to get taxed like a dividend payout. You will receive a sales schedule with your K-1 that will tell you where to put all the numbers on your return. You will be absolutely shocked at the amount of ordinary income you will be reporting on Form 4797, Part II, Line 10. That $25 per share is going to come in handy if you hold this through the transaction.

[schwagnasty]

@rlp2451 appreciate the info. from what i can tell shares will not convert to OneOk

so basically hold until deal is done and get $67 per share... or see if somehow goes above $67 and then sell

[JackCr]

Anyone have thoughts on how to best hedge the significant portion of Oneok shares that are a part of this deal?

Buy puts, or sell the shares short now, perhaps?

[MichaelW_R]

Is the Queen of M&A at the FTC going to look kindly on this combination?

[Lorem Ipsum DSA]

Glad to sell out of this.

[patientmike]

I will echo another comment. Just buy epd.